Large informal economy (25% of the workforce) and low participation rate (56%)

RISK ASSESSMENT

Growth will slow in the wake of investment

In 2019, growth will slow in the wake, which will continue to be driven mainly by the continued construction of the first 41 km section of the motorway between Podgorica and Mateševo from the port of Bar to Boljare on the Serbian border – although disbursements are expected to decrease gradually as the work approaches completion. At the same time, foreign investment in tourism infrastructure will continue, developing a sector that is crucial to the economy (10% of GDP). Conversely, private consumption will continue to make a small contribution to growth, with wage stagnation partially offsetting the positive effects of lower unemployment. Despite record levels of tourism, the contribution of foreign trade will remain negative due to the high level of imports related to the construction of the motorway.

Further budgetary consolidation, pending the completion of the motorway

Despite significant fiscal efforts since 2017, the public accounts will remain in deficit in 2019. While fiscal consolidation has resulted in higher revenues in 2018 (higher taxes on tobacco, soft drinks, and alcohol, as well as an increase in the ordinary VAT rate from 19% to 21%), the 2019 budget savings will be mainly concentrated on expenditure. Structural adjustment, which is less than in previous years (0.75 pt of GDP compared to 3 pt cumulatively in 2017 and 2018), will likely involve continuing the partial freeze on civil service salaries and controlling current expenditure, although the latter is subject to upward uncertainty due to the upcoming 2020 parliamentary elections. In addition, while taxes on coal will increase, taxes on tobacco were lowered at the end of 2018, due to the fall in income caused by the rise in the black market. At the same time, the pension system is in deficit – more than 2% of GDP in 2017, financed by the state – due to the many early retirements. Tax reductions to attract foreign investment in tourism, such as the application of reduced VAT at 7% for luxury hotels, are costly. However, the decisive explanatory factor is the construction of the motorway, with the cost of its first section representing 25% of GDP, without which the budget balance would be in surplus. The project is being carried out by China Road & Bridge with a local subcontracting rate of 30%, is 85% financed by a 20-year US dollar loan from Exim Bank at 2% with a 6-year grace period. The balance is to be paid by Montenegro. The project, which was initially scheduled to be completed in 2019, could finally fall several months behind schedule, thus delaying the possibility of a budget surplus and a significant reduction in debt, which is currently very high. The government has announced its intention to use a public-private partnership (PPP) to finance the remaining 136 km, the cost of which will be slightly higher than the first section. Furthmore, the government will make disbursements (EUR 160 million) related to the purchase of shares in the public electricity company (EPCG) from the Italian A2A group.

The current account deficit will remain very high in 2019 due to the abyssal deficit in merchandise trade (nearly 45% of GDP). Exports, almost half of which are composed of metals (aluminium from the Kombinat Aluminijuma in Podgorica and steel from the Toscelik steel mill at Nikšić), are largely offset by imports of road infrastructure equipment, but also food and oil products. Tourism generates a surplus representing 20% of GDP. Russians (18% of tourists) should remain insensitive to the government's pro-Western positions. In the end, two thirds of the current deficit is financed by FDI, the balance by debt and undeclared capital inflows into second homes. External debt (160% of GDP at the end of 2017) will continue to grow, in line with its public share (one third of the total), as a result of external financing of the public deficit and the disbursement of the Chinese loan for the motorway.

Milo Djukanovic's victorious return

Milo Djukanovic, the historic leader of the Democratic Socialist Party (DPS) from the former Communist Party, won the April 2018 presidential election, with 54% of the vote in the first round. As with all elections since 1991, the pro-European DPS came out on top in the 2016 parliamentary elections (36 seats out of 91), far ahead of the main pro-Russian opposition coalition (Democratic Front, 18 seats), thus retaining executive and legislative power. Following Mr Djukanovic’s (ultimately temporary) withdrawal from politics in 2016, Duško Marković took over as head of a coalition government bringing together the DPS and ethnic minorityparties.

The government has completed the NATO accession process and is pursuing EU accession negotiations, which could be effective in 2025, subject to compliance with the criteria set by the EU. Despite the progress induced by these negotiations, the business environment remains marked by corruption, organised crime and the politicisation of justice, which hinders the enforcement of contracts and the treatment of insolvency. In 2018, Montenegro ranked 42nd out of 190 in the World Bank's Doing Business ranking (51st in 2016) and 77th out of 137 in the Global Competitiveness Report.